F&O OUTLOOK: Next resistance may be at 5,100

The Nifty is finding resistance around the 5,000 level and has not been able to close above this level in the last two days of trading. According to an analyst at Sharekhan Research, the next resistance level would be around 5,100.

The trading pattern in the futures & options segment suggests that a correction is not expected soon. A significant build-up in the 5,000 put option was visible during the week ended September 18 and it is likely that the September series will expire around this level.

According to technical analyst Kamalesh Langote, a rising wedge is being formed by the Sensex, similar to the January 2008 pattern. In both instances, the wedge was formed over several weeks and followed by a market collapse.

The rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. In contrast to regular triangles which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.

In the current situation, markets have broken out upwards from the wedge, but the momentum has stalled. The rising wedge contention is still valid if the breakout proves to be a false one. The confirmation would be a break of 16,000. For the Nifty, the level will be roughly at 4,700-4,750.

The rising wedge can be one of the most difficult chart patterns to accurately recognise. While it is a consolidation formation, the loss of upside momentum on each successive high gives the pattern its bearish bias.

However, the series of higher highs and lows keeps the trend inherently bullish. The final break of support indicates that the forces of supply have finally ended and lower prices are likely ahead. There are no measuring techniques to estimate the decline.

Normally, the implication of rising wedge is a sharp correction, or a 50 per cent retracement of the current pullback. The Sensex has moved up from 8,047 on March 9 to 16,750 on September 17 and, hence, a possible correction in the Sensex could be up to 13,000. The Nifty rose from 2,539 to 5,103 and, hence, a 50 per cent retracement will be around the 3,800 level.